Is HSBC The Ultimate Retirement Share?

The last five years have been tough for those in retirement. Portfolio valuations have been hammered and annuity rates have plunged. There's no sign of things improving anytime soon, either, as the eurozone and the UK economy look set to muddle through at best for some years to come.

A great way of protecting yourself from the downturn, however, is by building your retirement fund with shares of large, well-run companies that should grow their earnings steadily over the coming decades. Over time, such investments ought to result in rising dividends and inflation-beating capital growth.

In this series, I'm tracking down the UK large-caps that have the potential to beat the FTSE 100 (UKX) over the long term and support a lower-risk income-generating retirement fund (you can see the companies I've covered so far on this page).

Today, I'm going to take a look at HSBC Holdings (LSE: HSBA), my favourite pick from the UK's big banks. HSBC's name has been dragged through the mud this week, thanks to revelations that it was heavily involved in laundering Mexican drug money, but I don't think this changes the fundamental appeal of the business.

Global Appeal

One of the things I most like about HSBC is its combination of UK and emerging markets exposure. It has particular strengths in Asia, its historical base, and this has helped it outperform the UK's other big banks throughout the last few years. Unfortunately, it hasn't manage to outperform the FTSE 100:

Total Return

2007

2008

2009

2010

2011

Trailing 10 yr avg.

HSBC

-4.2%

-14.8%

10.6%

-5.1%

-20.9%

2.4%

FTSE 100

7.4%

-28.3%

27.3%

12.6%

-2.2%

6.6%

Source: Morningstar

(Total return includes both changes to the share price and reinvested dividends. These two ingredients combined are what make it possible for equity portfolios to regularly outperform cash and bonds over the long term.)

The trailing 10 year average total return is below that of the FTSE 100 but is fairly respectable considering the scale of the financial crisis we are going through. By way of comparison, Barclays (LSE: BARC), which also avoided a government bailout, has a 10 year average trailing total return of -3.7%.

What's The Score?

To help me pinpoint suitable investments, I like to score companies on key financial metrics that highlight the characteristics I look for in a retirement share. Let's see how HSBC shapes up:

Item

Value

Year founded

1865

Market cap

£99.6bn

Net debt

n/a

Dividend Yield

4.8%

5 year average financials

Operating margin

16.7%

Interest cover

n/a

EPS growth

13.1%

Dividend growth

-4.8%

Dividend cover

1.7x

Source: Morningstar, Digital Look

Here's how I've scored HSBC on each of these criteria:

Criteria

Comment

Score

Longevity

HSBC's 147-year history places it near the top of the pile.

5/5

Performance vs. FTSE

It has held its own against the financial crisis, but still suffered.

3/5

Financial strength

One of the better-funded banks, it's unlikely to have problems.

4/5

EPS growth

Recovering steadily and promising a more focused, profitable future.

4/5

Dividend growth

Cuts in recent years lose points, but overall a good record and an attractive yield.

3/5

Total

19/25

A score of 19/25 is impressive and suggests that HSBC is a candidate for a retirement fund portfolio. Its combination of Asian strength and attractive yield is particularly tempting and it's a share I hold myself. However, the eurozone crisis means that European banks remain risky, so you may want to consider some alternative ideas.

You can learn about Neil Woodford's top holdings and how he generates such fantastic profits in this free Motley Fool report. Many of Mr Woodford's choices look like excellent retirement shares to me and the report explains how he chose some of his biggest holdings.

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